By Pratik J Shah and Siddhartha K Shah
It is that time of the year when the Ministry of Finance strives to strike a balance between expenditure to be incurred and revenue collection. There is speculation whether the government will re-introduce Estate Duty as a new stream of revenue collection, which under law pertains to taxation of value of property passing on death.
As a reminder, India had Estate Duty from 1953 till it was abolished in 1985. The duty was abolished on the grounds of complications, which led to prolonged litigation and smaller revenue yields. While the shape and form of the new law can’t be predicted, we provide glimpses of the earlier law from which a few references may be drawn.
Basis and charge of taxation
Under the earlier law, the trigger for taxability was the death of the property owner. The charge was on all property passing immediately on death including period ascertainable by reference to death.
Property included and value mechanism:
The scope of coverage was wide to include all property, whether movable or immovable, including a residential house, interest in expectancy, interest in coparcenary property, debt or enforceable right, etc.
There were certain anti-avoidance provisions under which the property was deemed to pass on death, even though it was parted with during the lifetime of the deceased. Such examples included gifts made in contemplation of death or within 2 years prior to death, property settled in Trust whereby the interest in that property is reserved to the settlor or property transferred to a “controlled company” or property converted to joint holding, etc.
The value subject to tax was the principal value of the property, i.e. the price which, in the opinion of the Controller, the property would fetch if sold in the open market. Very few exceptions were available in terms of immovable property situated outside India and movable assets situated outside India (provided the deceased was not domiciled in India at the time of his death).
The maximum marginal rate was 40 percent and it could be levied on value of property exceeding Rs 50 lakh. The primary liability of discharging the Estate Duty was on the legal representative to whom the property was passed or benefit was vested.
In the first instance, the accountable person, was required to submit an account of estate received by him within 6 months from the date of death. Thereafter, the Controller would complete the assessment/provisional assessment, and determine the liability. Generally, the liability was to be discharged within 2 months. Certain relaxations were available for duty payable in respect of immovable property and property situated outside India.
The Prime Minister of India has set a target of making India a $5 trillion economy by 2024, next only to US, China and Japan. If this is to happen, a significant investment is required to be made by the government. Investment requires revenue (read contributions) by way of taxes, etc. The question for the government to consider is – will introduction of Estate Duty result in an increment in revenue collections on an annual basis for meeting the expenditure requirements.
A revenue projection is possible, provided it is possible to predict the number of individuals, who have property above the exemption threshold, to die every year to meet the revenue collection target. In the USA and the UK, estate duty/inheritance tax constitute less than two per cent of total revenue collection.
With the average life expectancy improving, the likelihood of any significant revenue collection being made by the government in the next 10 years appears bleak. Moreover, the administration of law, the process that needs to be followed for valuation of assets on the date of death, especially when the asset base is spread across geographies and other related matters were the primary reason for abolition of the law.
It should also be mentioned that Estate Duty was payable by the legal representative to whom the property may pass on death. The recipient of the property may not have the monies available and/or it may be possible to convert the assets into monies, as the assets may be illiquid or the asset may be such which cannot be transferred (ownership of family-run business or house), etc. There could also be situations of distress sale, which are best avoided.
Given these factors, the government should set out the objectives that this legislation may help to achieve before implementing it. In addition, it will be good to have a draft of the legislation available in public domain for comments, so that creases are ironed out before this is made into law.
Pratik Shah is Senior Manager and Siddhartha Shah is a Manager with Deloitte Haskins & Sells LLP. Views expressed are those of the authors.